Brazil's cash-rich power industry is itching to consolidate, and
some are making deals even in one of the toughest markets in
decades.
The debt profiles of Brazil's power players have improved on
rising electricity rates, while the share prices of companies that
could be targets have slipped, making them more attractive. On top
of that, Brazil's power sector, Latin America's largest, includes
big names - some of which have big appetites for growth.
For example, Companhia Energetica de Minas Gerais (CIG), better
known as Cemig, bought a 48% stake in three new wind farms for 213
million Brazilian reals ($92.3 million) this month.
Cemig was said to be in line to buy nearly a third in competing
energy company CPFL Energia (CPL) last month for BRL2 billion, but
CPFL partner Camargo Correa bought it instead.
Privately held Neoenergia's chief executive, Marcelo Correa,
said the company has BRL2.6 billion in cash and said in local
business daily Valor Economico recently that "everything is
attractive to us at this point".
"Neoenergia and Cemig can be the consolidators in this market,"
said Sergio Tamashiro, an energy analyst at Itau bank in Sao Paulo.
"Both have a lot of cash and Neoenergia could easily tap debt
markets even in this kind of environment."
Some of these companies might not need to pile on debt to fund
acquisitions. Cemig reported cash and cash equivalents of $3.01
billion as of Sept. 30 in its Form 6-K filed with the U.S.
Securities and Exchange Commission in December.
The domestic credit market does appear to be loosening up.
Central bank president, Henrique Meirelles, said Monday that local
credit markets have returned to pre-crisis levels. Using 100 as a
base for healthy credit availability, Meirelles said September was
around 92.7 points and January was 101.
More credit should facilitate a mild recovery in investment,
including in the power sector.
In late 2008, the government had to postpone a new transmission
line auction because a number of local and international companies
said they wanted to participate but couldn't get the financing for
downpayments on the greenfield projects if they were winners.
The government held the auction a month later and participation
was lower than expected.
Easier credit should also help drum up interest in beaten power
sector asset prices, which have been undercut by slowing economic
growth.
While it's expected to expand significantly less in 2009 than in
recent years, Latin America's largest economy is still likely to
grow a point or two this year, according to official estimates.
Domestic consumer demand and signs that commodities may be finding
a bottom bodes well for Brazil.
The recent performance of the country's stock market, by far the
largest in the region by market capitalization, certainly suggests
as much. Brazilian stocks are up 19% over the last three months in
dollars on the MSCI index.
Both foreign and local power firms are expected to be on the
lookout for attractive assets.
"Brazil will still be a key country for the international energy
infrastructure firms," said Juan Carlos Fassi of the global energy
section at the PA Consulting Group in Buenos Aires. "It was
completely impossible for these guys to acquire companies (in
Brazil) because companies were asking big money for their
assets"
The global credit crisis and a weaker real - down nearly 30%
year-to-date - has lowered the share prices of Brazil's publicly
traded utilities, even though they have outperformed the market.
Utilities in general are defensive stock picks in economic
downturns because of consumers' constant, baseline demand for
electricity.
"The international energy companies that want to be in Latin
America will more than likely keep their focus on Brazil simply
because the market, the regulatory policies and the politics there
are better than anywhere else in the region," Fassi said.
Brazil's biggest international energy names include AES Corp
(AES), Energias do Portugal (EDP.LB), and the Spanish groups Endesa
SA (ELE.MC) and Iberdrola (IBR.MC).
Most of the these companies will likely partner with local
energy players by acquiring a stake in existing companies or by
joining forces in new energy auctions for greenfield projects run
by energy regulator Aneel.
Although France's GDF Suez (GSZ.FR) has its hands full building
hydroelectric dams, it could pounce on Brazilian power assets at
any time, said sector consultant Alexandre Montes at Lopes Filho
& Associates in Rio de Janeiro.
"Suez is interested in anything that gives them a good return on
investment," he said. "Don't count them out of the scenario because
Suez has a very big appetite."
GDF Suez Energia Brasil chief executive, Mauricio Bahr, was
unavailable to discuss the companies expansion model.
For companies looking to grow through M&A, the well is
fairly dry for 100% acquisitions, though there are a couple of
immediate targets, said Montes.
He pointed to Endesa-owned Companhia Energetica do Ceara, or
Coelce, and Ampla Energia e Servicos, owned by Enersis SA, a
subsidiary of Endesa in Chile.
Local media reports said Endesa is looking to sell out of some
of its Brazilian power assets. The press office for Endesa in
Brazil neither confirmed nor denied the reports of an exit
strategy.
If they do put some of their assets up for sale, "Cemig is a
serious contender to buy Ampla from Enersis," Montes said, citing
its location on Cemig's home turf of Minas Gerais and Rio de
Janeiro states.
Cemig's chief financial officer, Luiz Rolla, did not return
calls for comment this week and Neoenergia's CEO declined to
comment.
According to Fitch Ratings, Brazilian energy companies have
rarely been in such good shape. The majority of them have improved
their credit profiles over the last five years, thanks in part to
rising demand and rising electricity rates, FitchRatings analysts
wrote in a recent report on Latin America's energy segment.
Companies have also benefitted from lowering short-term debt
obligations, so that most of the debt on the books is long term and
not denominated in dollars, eliminating risks from foreign exchange
fluctuations.
-By Kenneth Rapoza, Dow Jones Newswires, 5511-2847-4541,
kenneth.rapoza@dowjones.com
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